In the case of a covered loss, homeowners insurance policyholders must pay a specified amount out of pocket, known as the deductible. The insurance provider will cover the remaining damage up to the policy limit. It’s essential to understand your deductible to ensure you have the right coverage for your home. Here, we explain how homeowners insurance deductibles function and how to select the best one for your needs.

What is a home insurance deductible?

A home insurance deductible is the amount you pay out of pocket when you file a claim that gets approved. This differs from your insurance premium, which is the fee you pay to keep your coverage active. Generally, the higher your deductible, the lower your premium will be, but it’s crucial to choose a deductible that fits your financial situation.

To illustrate how homeowners insurance deductibles work, consider this example: If your roof sustains $10,000 in damage from a snowstorm and you file a claim that’s approved, and you have a $1,000 deductible, you will need to pay that $1,000 to the contractor. Your insurance provider will then cover the remaining $9,000.

Types of homeowners insurance deductibles

There are two primary types of homeowners insurance deductibles outlined in your policy:

  1. Dollar-Amount Deductible: This specifies a fixed dollar amount that you must pay out of pocket when making a claim. For instance, in the roofing example mentioned earlier, a dollar-amount deductible might be set at $1,000.
  2. Percentage-Based Deductible: This defines the deductible as a percentage of your home’s insured value. If your policy specifies a 2 percent deductible and your dwelling coverage is $150,000, your deductible in the event of a claim would be 2 percent of that amount, which equals $3,000.

It’s important to note that you may have multiple deductibles within the same policy. For example, you might have a dollar-amount deductible for most claims, but a separate percentage-based deductible for hurricane or named storm claims. Be sure to review your home insurance policy carefully to understand the deductibles that apply. If you have any questions, don’t hesitate to reach out to your insurance agent for clarification.

How to choose a homeowners insurance deductible

When shopping for homeowners insurance, one of the key factors to consider is your home insurance deductible. Ensure that you can comfortably afford the deductible amount on short notice in case you need to file a claim.

As you review your budget, think about your premium costs. Then, ask yourself these questions when selecting a homeowners insurance deductible.

How much can I afford to pay if I have to file a home insurance claim?

Evaluate your financial situation, including your income, assets, and savings, to determine how much you can afford to pay out of pocket for home damage. You want to choose a deductible that won’t lead to financial strain if you need to make a claim. Discuss your affordability with your home insurance provider; they can offer options and explain how your choice will impact your premium. If you need assistance with budgeting before shopping for home insurance, consider consulting a certified financial planner.

How much risk am I comfortable with?

Choosing your home insurance deductible largely depends on your risk tolerance. If you’re comfortable with the chance of facing a larger out-of-pocket expense in the event of a claim, you can opt for a higher deductible and enjoy lower monthly premiums. However, if a significant one-time expense is not manageable for you, it may be wiser to select a lower deductible, resulting in higher premiums to provide more financial security.

How does my home insurance company handle deductibles?

Each insurance provider has its own procedures, and these can vary for different types of coverage. It’s crucial to know your responsibilities in the event of a claim. Inquire about the standard deductible options for each coverage type that requires one.

Understanding the claims process is also important. Generally, homeowners are required to pay their deductible directly to the contractor handling the repairs. In some cases, the insurance company may request the deductible upfront before releasing payment to the contractor. Clarifying these details with your insurance provider will help you know what to expect if you need to file a claim.

How deductibles affect premiums

Keep in mind that choosing a lower deductible will result in a higher premium, and vice versa. For example, homeowners opting for a $1,000 deductible typically face a national average home insurance cost of about $2,230 per year for $300,000 in dwelling coverage. In contrast, selecting a $2,000 deductible brings the average annual premium down to approximately $2,046.

However, these figures are averages, and your actual premium may vary based on factors specific to you and your home. It’s a good idea to obtain home insurance quotes with different deductibles to find the optimal balance between a manageable premium and an affordable deductible.

The main takeaway is that by assuming more risk with a higher deductible, you should see a reduction in your annual premium, assuming all other factors remain constant. Since deductible options can differ among insurance providers, it’s beneficial to discuss this with an agent while shopping around to understand how different deductibles could impact your premium.

How do deductibles work with natural disasters?

Natural disasters pose significant risks to homeowners, often leading to extensive property damage. Most homeowners insurance policies cover common natural disasters such as wildfires, wind, hail, lightning, and snow. However, floods and earthquakes usually require separate insurance policies or endorsements for coverage. It’s important to review your insurance policy to understand what is covered and what disaster assistance you may be eligible for.

For damages from covered disasters, your deductible functions the same way as it does for any other type of damage. You would file a claim and pay the deductible specified in your policy, with the insurance company covering the remaining repair costs up to your policy limit.

Coverage for earthquake and flood insurance often involves a percentage-based deductible, particularly in high-risk areas, where deductibles can reach up to 10 percent of the insured value. Additionally, in states prone to hurricanes, an extra deductible may apply. Currently, 19 states and the District of Columbia allow insurers to charge a hurricane deductible, which is typically calculated as a percentage.